The escalating US-China trade war is starting to leave bruises in Southeast Asia. Manufacturing in Malaysia and Singapore is reportedly contracting, while the number of Chinese travelers to tourism-dependent Thailand and Laos is fast declining.
With a protectionist US warring against a free trade China, at least according to the narrative spun by Beijing, there is more urgency than ever for Southeast Asia and China to conclude the world’s potential largest free trade pact.
Negotiations for the 16-member Regional Comprehensive Economic Partnership (RCEP) began in 2013 and have now gone through more than 20 rounds of inconclusive talks. An initial 2015 deadline passed without much disquiet, as have two subsequent deadlines.
In June, as the US-China trade war gathered steam, negotiators said they hope to finalize the pact by the end of 2018, though some analysts remain skeptical as only five of 18 chapters of the deal have been agreed after five years of talks.
The RCEP pact includes all ten members of the Association of Southeast Asian Nations (Asean), as well as China, Japan, South Korea, India, Australia and New Zealand.
If and when it comes into effect, the RCEP will constitute the world’s largest trading bloc with a combined gross domestic product (GDP) of US$49.5 trillion encompassing more than half of the world’s population.
The Malaysian and Singaporean governments have been particularly active in lobbying to accelerate progress in the negotiations. Singapore Prime Minister Lee Hsien Loong said recently that he hopes the trade deal can be concluded by the end of the year.
Meanwhile, Malaysia’s International Trade and Industry Ministry last month called for “renewed momentum” in order to close the deal by early 2019, before India and Australia hold general elections which could delay the talks amid political transitions.
“The conflict between the US and China has provided the impetus for an early conclusion of the RCEP,” said the Malaysian ministry’s deputy secretary-general Datuk Norazman Ayob last month.
So far US President Donald Trump’s administration has imposed tariffs on more than US$200 billion worth of Chinese exports, to which Beijing has responded with its own tariffs on a lesser amount of China-bound American exports.
China’s central bankers are now questioning what monetary policy to follow amid a major stimulus package, while its currency is tanking and could soon hit the psychological seven renminbi to the US dollar exchange rate.
That’s raised concerns about possible competitive devaluations of Southeast Asian currencies as the region’s exports start to feel the trade war pinch. News reports say the trade war is also denting South Korean and Japanese exports to China.
Some regional nations may profit from the trade war – Vietnam is thought to be weathering it far better than others – but the International Monetary Fund recently downgraded its Southeast Asia growth forecast for 2019 to 5.2%, down from 5.3% this year, in part because of the US-China trade war.
While prospects for a near-term solution to the trade war are uncertain, finalizing the RCEP deal would be a boon for Southeast Asian economies regardless.
One incentive for speeding up the RCEP’s conclusion is that the Trans-Pacific Partnership (TPP) – an American designed free trade deal that Trump withdrew the US from in January 2017 – is likely to come into effect by the end of the year after Australia became the sixth country to ratify it last month.
Brunei, Malaysia, Singapore and Vietnam are among the 11 Pacific-rim nations that agreed to a watered-down TPP deal in March, at which it was rebranded the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
Singapore, however, is the only Southeast Asian signatory to ratify it domestically, though Vietnam is thought to be close to doing so.
As part of the revised TPP agreement, most tariffs on exports between signatory nations will fall to zero the day it takes effect, while tariffs for some agricultural products may take as long as seven years to be lifted.
But without the US or China, the latter of which was excluded from TPP talks, the pact has become less important than the RCEP. If America was part of the TPP, it would have accounted for 40% of global trade; without it, the pact now just accounts for 13%.
For Asean nations, moreover, the regional focus of RCEP makes more economic sense than the revised TPP. The latter includes the likes of Canada, Chile, Mexico and Peru, with which Southeast Asian nations have few trade links.
By comparison, the RCEP includes only Asia-Pacific nations with which Asean does most of its business. The importance of RCEP lies not in intra-Asean trade, which is limited in some respects as nations compete largely in similar products.
The Nikkei Asian Review recently reported that 98.6% of regional tariffs have now been removed through trade liberalization measures included in the Asean Economic Community (AEC), with the likes of Cambodia and Laos gradually catching up to regional expectations on free trade.
Asean has already signed what some economists call a “spaghetti bowl” of free trade agreements (FTAs) and economic partnership agreements (EPAs) with most other RCEP members, including in a free trade area with China enacted in 2002. Not all tariffs were removed in that deal, however.
But given the wildly varying tariff rates and rules-of-origin conditions of these agreements, one single free trade pact would make foreign trade much simpler for Southeast Asian businesses.
It would also simplify rules for foreign investors entering Southeast Asia, where foreign firms currently face widely divergent requirements and tariffs from country to country.
Simplification, free trade advocates hope, would greatly boost Southeast Asian businesses’ role in Asia-wide supply chains. Indeed, several multinational firms are now divvying up their production processes across Asia.
A computer chip, for example, might be worked on in South Korea, then Vietnam, then Thailand, before being sold to China. One unified system of tariffs and customs procedures would greatly simplify how regional supply chains function, as well as potentially make them more profitable.
This is particularly important for countries like Vietnam that are trying to move away from low-skilled manufacturing into higher-end production, especially in technology-related industries.
Economists also argue that the RCEP is less rigorous than the TPP in terms of intellectual property rights and rights-related reforms, namely because authoritarian China is a leading party of the pact.
Under the original TPP, Vietnam would have had to accept independent trade unions, though in the revised CPTPP this requirement is substantially watered down. The RCEP, however, has no such requirements, meaning that the pact will have fewer domestic implications on the signatories than the TPP.
When representatives of the RECP’s 16 nations met last week in New Zealand for another round of talks, they agreed to a crucial chapter on dispute mechanisms, meaning five of the deal’s 18 chapters have now been finalized.
There were hopes the whole pact could be concluded in time for the upcoming Asean Summit in Singapore, which starts November 11, but after recent talks in Auckland it still seems doubtful it will be wrapped up within this year.
The stumbling blocks, it seems, are mainly from non-Southeast Asian nations. For example, India and China, whose militaries almost clashed last year, have no bilateral free trade agreement and entering into a multilateral trade pact is posing difficulties.
There are also been widely divergent views on issues like intellectual property rights. The four Southeast Asian signatories of both the RCEP and the TPP could also be leveraging for greater American involvement to hedge against potential Chinese domination.
Indeed, one concern expressed by some Southeast Asian analysts early in the RCEP’s negotiations was that it could lead to Chinese dominance, however such fears were mitigated as Japan and India played a greater role in the pact’s talks in recent years.
If the RCEP comes into effect during the Trump presidency – so assuming it is ratified before early 2021 – then it could bring the US back to the negotiation table for the TPP.
Peter Navarro, director of the US’s Office of Trade and Manufacturing Policy, is thought to be the leading opponent of the TPP in Washington.
But in April Trump told his advisors to study whether the US should re-engage with the TPP, while there are reports that the United Kingdom, once it leaves the European Union next year, could join the trade agreement as well.
If Trump feels as though America is losing out, and China is gaining ground, because of RCEP, some analysts reckon he could push for the US to re-enter the TPP.
For Malaysia, Vietnam, Singapore and Brunei, this would mean two massive free-trade pacts with the world’s two largest economies: China and the US. And with Japan party to both pacts, they would if concluded and enacted include the world’s current three largest economies.